by
Gary North
Tea Party Economist
Recently
by Gary North: San
Francisco Teens Create Rent-a-Car Company. City Sues Them: ‘Unfair
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The Federal
Reserve is in damage-control mode. Last week’s announcement
by Bernanke unilaterally scrapped the official unemployment rate
target of the Federal Open Market Committee (FOMC), which sets monetary
policy. I reported
on this on June 25.
He raised the
target from 6.5% to 7%. This indicated that the FOMC has decided
that it could stop inflating earlier than previously reported. This
is what Bernanke said: QE3 may “taper off” this year.
His announcement
sank stock markets around the world. It created a panic-driven crisis
based on the idea that the FOMC might stop the printing presses
early.
Mortgage rates
are up
by a third from last December, when the Federal Reserve adopted
QE3. The FOMC said at the time that it did this to keep mortgage
rates down. The policy has blown up in the FED’s face.
To the rescue
comes the #2 Federal Reserve official, William Dudley, the president
of the Federal Reserve Bank of New York, which is the most influential
of the 12 privately owned regional FED banks. Before he was president,
he was the chief economist for Goldman Sachs. In short, he is the
#2 person of influence in the Federal Reserve System.
The Bloomberg
headline said it well: “Federal Reserve officials intensified
efforts to curb a growth-threatening rise in long-term interest
rates, seeking to clarify comments by Chairman Ben S. Bernanke that
triggered turmoil in global financial markets.”
Clarify, my
foot. They are seeking to rein in Bernanke, who on his own authority
changed the targets. Dudley is the Vice Chairman of the FOMC. They
are trying to put out the interest rate fire that Bernanke’s
comments last week produced in the bond market and mortgage market
– the targets of QE3.
Bernanke has
gone rogue. Dudley is trying to bring him under control. He is trying
to persuade investors that QE3 is here to stay, and that the FED’s
monetary inflation will continue to prop up the faltering U.S. economy.
Bloomberg reports
that he insisted that any reduction of asset purchases would not
represent a withdrawal of stimulus.
How’s
that again? A reduction of money creation to buy government bonds
and Fannie Mae/Freddie Mac mortgage bonds would not be a reduction
in the stimulus? I am afraid I do not understand. The FOMC announced
the program in December by announcing an increase in purchases.
That is how the FOMC creates the supply money: by purchases of assets.
If it ceases to purchase assets, it automatically decreases the
stimulus.
Dudley also
insisted that an increase in the Fed’s benchmark interest rate
is “very likely to be a long way off.” He said bond purchases
– this is stimulus – will continue if economic performance
does not meet the FED’s forecasts.
But what are
these forecasts? He did not say.
He was joined
by FED governor Jerome Powell and the Atlanta FED president Dennis
Lockhart. Bloomberg said they “sought to damp expectations
that an increase in the benchmark interest rate will come sooner
than previously forecasted.”
The word “damp”
means “put out fires.”
The FED is
in damage-control mode. Bloomberg quotes Dudley: “Such an expectation
would be quite out of sync with both FOMC statements and the expectations
of most FOMC participants.” This is what I reported on June
25. Bernanke’s announcement was a unilateral scrapping of the
FOMC’s official boilerplate statement, which it publishes word
for word every
six weeks.
The
FED’s regional leaders are dealing with Bernanke, who is clearly
preparing for his departure on February 1. Bernanke is asserting
his independence. Dudley and others are trying to put out the fires
until he departs.
Their approach
is to say that the markets
misunderstood Bernanke. The markets in fact heard Bernanke loud
and clear. The FED officials are doing their best to pull Bernanke
back into the pen. They are trying to make it look as though he
has not gone rogue. A rogue Chairman would indicate dissent in high
places. That would rattle the markets. So, they pretend that investors
misunderstood Bernanke. It papers over what has happened.
We will now
see who is in charge.
Continue
Reading on www.bloomberg.com
June
29, 2013
Gary
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 31-volume series, An
Economic Commentary on the Bible.
Copyright ©
2013 Gary North
Republished with permission from:: Lew Rockwell